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Treasury nominee aims for a bigger, stronger IRS

President Trump’s pick for Treasury Secretary, Steve Mnuchin, saw his nomination passed out of the Senate Finance Committee today after Republicans suspended parliamentary rules to allow a straight party-line vote. A banker, Mnuchin recently voiced approval of increased funding for the Internal Revenue Service, while saying it is understaffed and “under-resourced.” He argued that the IRS should be exempt from the current federal hiring freeze.

Mnuchin, a banker, was Trump's campaign finance chairman. He and his ex-wife, Heather, donated to Hillary Clinton in previous elections, according to The Hollywood Reporter pointed out

According to an opinion piece by William Gale of the Brookings Institute, IRS funding in 2016, when adjusted for inflation, was the same as in 1998. “As a result, IRS employment has fallen about 27 percent – by 30,000 workers – since then,” read a Brookings report.

For 2008-2010, the IRS estimates that an average of $458 billion per year in tax liabilities were not paid timely and that only $52 billion of that amount will ever be collected. That means that $406 billion in taxes owed in each of those years that were never paid. The Brookings report said, “Assuming that such shortfalls go on every year and remain a constant share of the economy, $510 billion of taxes owed in 2016 went unpaid. To put that in perspective, that’s almost as large as the entire federal budget deficit – $587 billion in 2016.”

The IRS, claimed Brookings, has computer programs and systems that “belong in museums.” The IRS is being challenged by new obligations imposed by the Affordable Care Act (Obamacare), expansions of the Earned Income Tax Credit, the American Opportunity Tax Credit, as well as increased reporting on assets held in offshore accounts. The Brookings report contends that IRS need modern computing assets.

The IRS cited the increased workload as the reason why wait-times for citizens calling for assistance have skyrocketed. The report said that last year, a little less than half of taxpayers calling the IRS for assistance actually received it. Taxpayers waited double the time for assistance in 2016 than they did in 2011.

Collection and enforcement efforts by the IRS have slowed. For instance, in 2015, the IRS audited only 0.8 percent of individual and 1.3 percent of corporate returns, compared to 1.1 and 1.4 percent respectively in 2010 and 1 and 2.1 percent respectively in 1998. The audit rate for households with income over $1 million has fallen by 40 percent since 2010. Increased funding for IRS may mean more audits.

In April 2016, former Treasury Secretary Jack Lew also said that IRS is underfunded. “Budget reductions at the IRS cost the country billions of dollars each year in lost revenue, contribute to inadequate customer service for taxpayers and leave necessary cybersecurity protections unfunded,” Lew told the Senate Appropriations Financial Services and General Government subcommittee. In fiscal 2016, funding for IRS increased for the first time in several years, but Lew said it remained “underfunded.” At that time, IRS was asking for an increase of $1 billion for fiscal year 2017.

“A sustained deterioration in taxpayer services combined with diminished enforcement capacity could create serious long-term risk for the U.S. tax system,” he added.

The IRS received a funding increase in fiscal 2016 for the first time in several years, but the agency remains “severely underfunded,” Lew said. The agency is requesting a total funding increase of about $1 billion for fiscal 2017.

“The IRS may have made some public, political mistakes in the past,” said the Brookings report. “Cutting IRS funding, though, punishes all of us, particularly the law abiding folks who pay taxes. Instead of cutting the IRS budget, Congress should listen to Mnuchin and give the IRS the funds it needs to administer our tax system.”

An alternative to the current income tax scheme was supported by Vice President Mike Pence when he served in the House of Representatives. A tax on consumption, which is advocated by the Fair Tax organization, may increase revenues by taxing consumption while giving every taxpayer a "pre-bate": a minimum income.

In an earlier interview with Spero News, Steve Hayes of Fair Tax said that the Trump is well-disposed toward tax reform. The Fair Tax would impose a tax rate of 23% on purchases of new goods and services after necessities. Under this scheme, Hayes said, the Internal Revenue Service would no longer be necessary and Americans would be able to keep all of their income. In the interview, Hayes said that a Fair Tax bill is endorsed by Vice President-elect Mike Pence and has 84 Republican co-sponsors.